Valuable property that's all in the mind

ECONOMIC VIEW; The US utterly dominates the world in owning intellectual property

In just over three weeks' time Microsoft will launch Windows 95. Or will it? The launch date, 24 August, is threatened by the US Justice Department, which may launch an anti-trust suit against the company. In recent days the share price of Microsoft has been plunging in response to such fears.

There are a number of different groups affected by this tussle. These obviously include Microsoft's shareholders and employees; its customers, competitors, and anyone interested in the regulation of industries. But these groups would be affected in any anti-trust question.

What makes the Microsoft business so fascinating is that it is the first time that anti-trust considerations are involved in intellectual property. An operating system for a PC has no physical entity: it is merely a stream of electronic signals, created by the minds of Microsoft employees.

The core concern of the Justice Department is that Microsoft has included within this new version of Windows software for accessing Microsoft Network, its new on-line information system. Jolly good, you might think, something for nothing. It is impossible nowadays to buy a computer without getting all sorts of software that you don't want thrown in; Microsoft is merely following the industry tradition.

Trouble is, since Microsoft utterly dominates the operating systems for the desktop computer, with some 80 per cent of the market, shovelling out easy access to its new on-line services gives those services an unfair advantage.

In 10 years' time there is not going to be much money in producing operating software for PCs because that market will have become mature: advance will have become incremental rather than exponential. But there will in all probability be an enormous demand for on-line services. The PC will be the entry point into a world-wide information library which, unlike the Internet, will be properly catalogued and ordered. Microsoft's eagerness to get into this market is wholly understandable. It has a wonderful asset, but possibly a wasting one.

In this it is like the telephone companies. They too have a powerful asset, the twisted wire into people's homes. But as the cost of communications plunges it is clear that this too is a wasting asset, and the companies have to find ways of using their access to introduce other products which will earn them more money. This explains why they are so miserable when they are told by the regulators that they cannot do so.

There is a further regulatory issue looming here in Britain concerning access to digital satellite TV. Should the decoding boxes that BSkyB, the dominant service provider, will presumably be selling to its customers be required to decode signals from other stations? Digital TV does not yet exist, and you might argue that if BSkyB wanted to introduce it and give people the boxes to unscramble the signal, that would be fine. If the BBC wanted to bring in its system then it too could hand out its boxes. But will people want more than one box on top of their set? Should one require the pioneer to provide access to competitors, and on what terms?

In an way this is an old argument, a bit like the case for requiring tied pubs to serve a "guest beer". But what takes the debate onto a different plane is the crumbling demarcation lines between the big players. If the monopoly or oligopoly is a physical product like beer and it is being served in an identifiable place like a pub it is easy to identify the interest groups. But we are moving to a world of crashing barriers. A TV company need not be just in television. Only yesterday Disney, the best brand name in the film business, announced it was buying the US TV network ABC. A phone company need not just be in phones; and a computer software company is eager to sell services down the wire rather than on disks.

The truth is that no one knows which of the three main competing technologies - telephone, television, and personal computer - will dominate during the next century. Everyone assumes that they will come together, which is probably right. Everyone assumes that the money will be in software rather than hardware, which is almost certainly right. The problem for the regulators is how to ensure that the fight is a reasonably fair one; that no one party is allowed to use a dominant position in one technology to shut out competitors from another.

Or at least that is the way they perceive their role. There is a further twist, perhaps the most interesting of all. Most of the intellectual property in the world is produced by the US. As the graph shows, it utterly dominates the world market. We are a very poor second, while otherwise only Sweden manages to achieve a surplus. Unsurprisingly, Germany and Japan are in the heaviest deficits.

This dominance does not just reflect software exports, though that is a large part of it. It also reflects Hollywood and the pop music industries. In the case of the UK and Sweden it is our pop music that helps us into surplus.

The twist is that US regulators need to think strategically about US national self-interest. This is not something that US regulators, particularly the Justice Department, find natural to do. But picking up the pieces when national self-interest is threatened is a long and painful process. Look at the difficulties US trade officials have had trying to open Japanese access to US products.

The new world standards will be established by intellectual property standards, and the US has an opportunity to capitalise on its astonishing dominance in the "bits" of information fabricated in Silicon Valley and Seattle. Of course regulators have to protect US consumers from an over-aggressive use by companies like Microsoft of their market dominance. But they should also give those companies the freedom to impose American intellect on the rest of the world.

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